What is a free trade zone in China and why should you consider one for your company setup?

China has long been an attractive destination for entrepreneurs the world over.

Offering a lower tax rate compared to most European startups, a strategic

location at the heart of the world’s largest and fastest emerging markets, and a

government committed to nurturing and supporting business, it’s not hard to see

why. But while these may be the factors that get the headlines, there’s another

major reason why so many flock to China’s shores to do business – the free trade zones.

China’s free trade zones are essentially economic areas where goods and services can be traded, usually at preferential tax and customs rates. They were originally rolled out to boost international business in the region by offering benefits such as 100% foreign company ownership.

Over the years, China’s free trade zones have evolved to offer ever-increasing advantages to the businesses within them. Many free trade zones cater to specific industries or business types. So why is free trade zone setup such an attractive option, and what could it mean for your business?

Why set up in a free trade zone?

If you’re looking to set up a company in China, there are plenty of reasons to choose a free trade zone:

Easy setup:
The set up process in most free trade zones is incredibly straightforward. The exact application process will depend on your business activity and chosen free trade zone but in many cases, you are only required to provide some basic documentation such as passport copies and business paperwork. The whole process often takes just 20 working days compared to a couple of months.

Tax and customs duty:
This is perhaps the most compelling reason to choose a free trade zone: the tax and customs regime. Set up in a free trade zone involves the benefit from a 25% corporate tax rate and free customs duty rates and VAT upon importation freeing up capital and only paying on consignment upon selling into domestic China.

Foreign ownership and Negative Lists:
Another major plus to setting up in a free trade zone is foreign company ownership. Most entrepreneurs from overseas wanting to set up in China must work with a local partner to do certain business lines. This is not the case in China’s free trade zones – set your business up here and you will retain 100% ownership.

In 2013 the State Council mapped out plans to implement a series of “Negative Lists” for market access, as part of the government’s efforts to establish an open, competitive and well-regulated China market. This was first tried and tested in the “new” Free Trade Zones – initially Shanghai, but then expanded to Tianjin, Fujian and Guandong. The pilot was a major step towards the government’s aim to explore a system that could be replicated nationwide for application in early 2018 as part of efforts to streamline government administration and give more freedom to the market.

The “Negative List” lists out industries, fields and businesses from which investments are barred or limited. Market access for foreign investors, therefore, can have equal access to industries, fields and businesses that are NOT on the list. Governments at all levels will be responsible for enforcement. In terms of the degree of enforcement, the lists can fall into two categories of prohibited entry and limited entry, both applying to initial and expanded investments, mergers, and other market entry behaviors by any voluntary market participants.

For the prohibited entry list, market players will not be approved to get access to such industries by the administrative authority, whereas, for limited entry, market players will have to apply for access, which will then be assessed by the authority, and then meet the requirements laid out by the government.

It is important to bear in mind that many of the policies initiated in the zones have already been rolled out to the rest of the country and this trend is likely to continue; meaning that the advantages of being in the Free Trade Zones are limited and need to be explored in-depth for each company looking to enter the market.

How to set up in a China free trade zone

If you’re sold on the benefits of doing business in a free trade zone, there’s more good news – set up takes just five simple steps.

Step one: Choose your business activity.
There are thousands of business activities to choose from and it is possible to select multiple activities under one license. Your business activities will help to determine the free trade zone that best suits your needs.

Step two: Finalize your company name.
Deciding on a company name can be a challenge anywhere in the world, but here in China - with its specific rules regarding naming conventions – this is a task you’ll want to tick off as early as possible. There are a few things to keep in mind here: offensive language is forbidden, company names cannot contain religious references, or references to any known organizations. As there are a few other quirks to the China naming process, it’s best to work with a company formation specialist who can help you decide on a compliant name and check that it is available to register.

Step three: Finalize paperwork and submit your application.
Setting up in a China free trade zone usually only requires a few standard documents: completed application form, shareholder passport copies and the like. Some free trade zones may also require you to provide a business plan. Again, it is a good idea to work with a company formation specialist at this stage who can ensure all is in place before making your application to avoid any unnecessary delays.

Step four: License notification and opening bank account.
You’ll be notified as soon as your license application is approved so you can collect your corporate documents and get to work. With this paperwork in hand you can open your corporate bank account and start trading. Your chosen company formation specialist can usually help you with finding a suitable bank. Alternatively, you’re welcome to approach any financial institution on your own.

Step five: Visa processing.
The final step in the business setup process is immigration and visa processing for any foreigners that may be then residing into China. Free trade zone authorities or a company formation specialist can manage this process on your behalf – assisting with your application and liaising with relevant government departments.

And that’s all there is to it. All that’s required is a few hours of your time and some basic documentation and you could be trading from a UAE free trade zone – and reaping all the benefits that come with it – in just a few short months.

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.